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housing bail-out
Source Jim Devine
Date 09/02/18/18:43

New York TIMES
Obama Unveils $75 Billion Plan to Fight Home Foreclosures
By SHERYL GAY STOLBERG and EDMUND L. ANDREWS

MESA, Ariz. President Obama pledged on Wednesday to help as many as
9 million American homeowners refinance their mortgages or avert
foreclosure, an initiative he said would shore up distressed housing
prices, stabilize neighborhoods and slow a downward spiral that he
said was "unraveling homeownership, the middle class, and the American
Dream itself."...

The plan has three basic components. One would help homeowners who
continue to make loan payments on time, but are paying high interest
rates and would otherwise not be able to refinance because they do not
have enough equity or their houses are worth less than they borrowed.
A second would assist people who are at risk of foreclosure by
providing incentives to lenders to alter the terms of loans to make
them substantially more affordable to struggling homeowners. The third
would try to assure there is plenty of credit available for mortgages
by giving $200 billion of additional financial backing to Fannie Mae
and Freddie Mac, the two government-controlled mortgage finance
companies.

The announcement came a day after Mr. Obama signed his $787 billion
economic recovery package, and administration officials like Timothy
F. Geithner, the Treasury secretary, made the case that they will work
in tandem. In announcing the housing plan, Mr. Obama struck a populist
note, criticizing speculators and "lenders who knowingly took
advantage of homebuyers" with the same vehemence he used in going
after Wall Street bankers for giving themselves bonuses as their
companies were seeking government help.

"It will not help speculators who took risky bets on a rising market
and bought homes not to live in but to sell," he said, adding, "And it
will not reward folks who bought homes they knew from the beginning
they would never be able to afford."

The plan will take effect March 4, when the administration publishes
detailed rules explaining it. Most of the plan can be enacted by Mr.
Obama though his executive powers, although part of it including
changing the bankruptcy laws to allow homeowners to seek changes to
their mortgages through bankruptcy proceedings will require
legislation. Mr. Geithner said the administration is already in
discussions with lawmakers on how to proceed.

In allowing homeowners who are not delinquent to qualify, the plan
marks a sharp break from the housing policies of Mr. Obama's
predecessor, George W. Bush. Mr. Geithner and the new Housing
secretary, Shaun Donovan, said the administration's research had
determined that, with 10 percent of American homeowners either in
foreclosure or in danger of it, it was better to intervene early.

Mr. Obama's plan boils down to a handful of basic components that are
aimed at two distinct groups of homeowners: an estimated 3 million or
4 million distressed homeowners who are in danger of foreclosure; and
a potentially much larger number of people who are not in immediate
distress but are paying rates higher than available to credit-worthy
borrowers now and who would likely be resentful about bailouts going
to others.

To help distressed homeowners, Mr. Obama will create a $75 billion
program to subsidize loan modifications that would reduce a family's
monthly payment to as little as 31 percent of his or gross monthly
income.

As envisioned, a mortgage lender would have to first make enough
concessions to reduce a borrower's payments to 38 percent of monthly
income. The government will offer a series of financial incentives to
encourage lenders to make the concessions. At that point, the
government would match, on a dollar-for-dollar basis, additional
reductions to bring the payment as low as 31 percent of monthly
income.

The changes could be accomplished in several ways, from stretching out
the repayment period of a loan to reducing the interest rate or
reducing the outstanding principal.

But the plan would not come close to preventing all foreclosures,
because lenders would still have the last word on whether to make
concessions. If a lender decides that the cost of the concessions is
higher than the cost of foreclosing, even with the government
subsidies, then a borrower would probably still lose the property.

That could be the case for many people who have lost jobs in the
automobile industry and have little hope of being rehired. A family
whose income has dropped by half and whose mortgage payment might now
equal 100 percent of its monthly income might well be out of the
program's reach.

The incentives for mortgage-servicing companies to tilt their
calculation in favor of loan modification include a $1,000 fee for
each mortgage they restructure as well as up to $1,000 a year for the
next three years if the borrower remains current. In addition, the
government would pay up to $1,000 a year to reduce the size of a
homeowner's mortgage, if the borrower remained current.

A second major component of Mr. Obama's plan is aimed at most
homeowners who are not behind on their payments, but whose homes may
be worth less than the outstanding amount on their mortgage or no
longer worth enough that the homeowners have sufficient equity to
refinance. It could also assuage homeowners who angry that seemingly
irresponsible neighbors are being rescued.

For this group, Mr. Obama's plan would make it much easier to
refinance their homes and take advantage of the extremely low interest
rates now available.

The plan would apply to people with fairly traditional loans that are
owned or guaranteed by Fannie Mae and Freddie Mac. Anybody with such a
mortgage would be allowed to refinance at today's rates, which are
about 5 percent, without needing a 20 percent downpayment.

Normally, Fannie Mae and Freddie Mac require that such borrowers pay
private mortgage insurance, which can add hundreds of dollars to a
monthly payment. In effect, the government would be taking on the
added risk, at no charge, that comes from lending to people with no
financial stake in their house.

A third and a more vague component of Mr. Obama's plan is aimed at
propping up the mortgage market as a whole by having Fannie Mae and
Freddie Mac step up their purchases of mortgages and mortgage-backed
securities.

To make that possible, the Treasury Department will use its authority
under a housing bill passed last year to provide more capital to both
companies. The Bush administration had pledged to provide up to $100
billion to each company to keep it solvent. The Obama plan would
increase that to $200 billion. The plan would also allow the two
mortgage companies to expand the size of their mortgage portfolios.

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